Tips for those considering filing bankruptcy

Are you experiencing financial difficulties and contemplating bankruptcy? If you are, just a few reminders.

All of the assets that you own and a list of liabilities that you owe are turned over to a bankruptcy estate on the day of the filing. You are familiar with all that you have, but did you know that your IRS tax refund is an asset and will become part of the bankruptcy estate? Since we are coming to the end of the year and tax returns will be filed shortly, the refund will be a prime target of the trustee.

Regardless of when the return is filed, whether it is extended until October 2013 or not, the ownership of the refund becomes your property and under Chapter 7 bankruptcy, subject to control and liquidation by the trustee. If you properly disclose and fully exempt your interest in this refund, you might be able to keep it all tax refunds are the No. 1 asset that bankruptcy trustees successfully go after. Your ability to retain this refund is dependent on state exemption laws.

It is very important that a very competent bankruptcy attorney be engaged to work your way through this maze. In the event that the bankruptcy is being considered, perhaps this action should be done after the tax return was filed and collection received. A discussion with the attorney might be in your best interest to keep the refund as low as possible which can be accomplished by changing the amount of exemptions claimed with your employer so that the weekly net pay will be increased.

A recent court case in Minnesota involved a married couple that was forced into involuntary bankruptcy but the creditors of the husbands business. As part of the settlement, the trustee paid the IRS back taxes totaling nearly $600,000. During the bankruptcy the couple divorced and the case plodded along.

As it turned out the IRS received the large payment but did not properly credit the money to the tax liabilities and sent a notice that there would be a refund of almost $520,000 plus interest. The ex-husband contacted the IRS twice and also received a letter from the Taxpayer Advocates Office that the refund check would be forwarded to him. After receipt, the couple deposited the funds in a joint account and began to write several checks from that account. But all good things come to an end and the IRS realized that the check was issued in error, The IRS sent collection letters to the last known address of the taxpayers and they were sent back stamped “return to sender.”

Shortly after the husband died and the wife later testified that her husband did not see any reason to respond to the government as the “money was gone.” The government filed suit against his estate and eventually proceeded to recover money under the Minnesota Uniform Fraudulent Transfer Act. Under this Act, the money must be returned under the doctrine of unjust enrichment. The widow argued she was not unjustly enriched as she did not know that the refund was erroneous. She relied on the IRS assuring the deceased that the refund was proper. The court stated however that the taxpayer cannot rely on the mistaken advice of an IRS agent. They concluded with the thought that “those who deal with the government are expected to know the law and not merely rely on the conduct of the governments agents contrary to the law.” She was required to pay back her portion of the erroneous refund.

Observation: If ignorance is bliss, what’s the sense of intelligence tests?

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